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BUSINESS SUPPLY CHAIN

Supply Chain Management (SCM): How

It Works & Why It's Important
By JASON FERNANDO Updated January 26, 2024

Reviewed by MARGARET JAMES

Fact checked by RYAN EICHLER

What Is Supply Chain Management (SCM)?

Supply chain management (SCM) is the process of managing the flow of goods
and services to and from a business, including every step involved in turning
raw materials and components into final products and getting them to the
ultimate customer. Effective SCM can help streamline a company's activities to
eliminate waste, maximize customer value, and gain a competitive advantage in
the marketplace.

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KEY TAKEAWAYS
Supply chain management (SCM) is the centralized management of the
flow of goods and services to and from a company and includes all of
the processes involved in transforming raw materials and components
into final products.
By managing the supply chain, companies can cut excess costs and
deliver products to the consumer faster and more efficiently.
Good supply chain management can help prevent expensive product
recalls and lawsuits as well as bad publicity.
The five most critical phases of SCM are planning, sourcing,
production, distribution, and returns.
A supply chain manager is tasked with controlling and reducing costs
and avoiding supply shortages.

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 Supply Chain Management (SCM) Definition
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How Supply Chain Management Works

Supply chain management represents an ongoing effort by companies to make
their supply chains as efficient and economical as possible.

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Typically, SCM attempts to centrally control or link the production, shipment,

and distribution of a product. By managing the supply chain, companies can Ad
cut excess costs and needless steps and deliver products to the consumer
 faster. This is done by keeping tighter control of internal inventories, internal
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production, distribution, sales, and the inventories of company vendors.
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SCM is based on the idea that nearly every product that comes to market does
so as the result of efforts by multiple organizations that make up a supply
chain. Although supply chains have existed for ages, most companies have only
recently paid attention to them as a value-add to their operations.

5 Phases of Supply Chain Management

A supply chain manager's job is not only about traditional logistics and
purchasing but finding ways to increase efficiency and keep costs down while
also avoiding shortages and preparing for unexpected contingencies. Typically,
the SCM process consists of these five phases:

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 Planning
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To get the best results from SCM, the process usually begins with planning to
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match supply with customer and manufacturing demands. Companies must try
to predict what their future needs will be and act accordingly. This will take into
account the raw materials or components needed during each stage of
manufacturing, equipment capacity and limitations, and staffing needs. Large
businesses often rely on enterprise resource planning (ERP) software to help
coordinate the process.

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Sourcing
Effective SCM processes rely very heavily on strong relationships with suppliers.
Sourcing entails working with vendors to supply the materials needed
throughout the manufacturing process. Different industries will have different
sourcing requirements, but in general, SCM sourcing involves ensuring that:

The raw materials or components meet the manufacturing specifications

needed for the production of the goods.
The prices paid the vendor are in line with market expectations.
The vendor has the flexibility to deliver emergency materials due to
unforeseen events.
The vendor has a proven record of delivering goods on time and of good
quality.
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Supply chain management is especially critical when manufacturers are

working with perishable goods. When sourcing goods, companies should be
mindful of lead times and how well equipped a supplier is to meet their needs.

Manufacturing
This is the heart of the supply chain management process, where the company
uses its machinery and labor to transform the raw materials or components it
has received from its suppliers into something new. This final product is the
ultimate goal of the manufacturing process, though it is not the final stage of
supply chain management.

The manufacturing process may be further divided into sub-tasks such as

assembly, testing, inspection, and packaging. During the manufacturing
process, companies must be mindful of waste or other factors that may cause
deviations from their original plans. For example, if a company is using more
raw materials than planned and sourced for due to inadequate employee
training, it must rectify the issue or revisit the earlier stages in SCM.

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Delivery
Once products are made and sales are finalized, a company must get those
products into the hands of its customers. A company with effective SCM will
have robust logistic capabilities and delivery channels to ensure timely, safe,
and inexpensive delivery of its products.

This includes having a backup or diversified distribution methods should one

method of transportation temporarily be unusable. For example, how might a
company's delivery process be impacted by record snowfall in distribution
center areas?

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Returns
The supply chain management process concludes with support for the product
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and customer returns. It's bad enough when a customer needs to return a
product, but even worse if that's due to an error on the company's part. This
 return process is often called reverse logistics, and the company must ensure it
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has the capabilities to receive returned products and correctly assign refunds
forCONTENTS
TABLE OF them. Whether a company is conducting a product recall or a customer is
simply not satisfied with the product, the transaction with the customer must
be remedied.

Returns can also be a valuable form of feedback, helping the company to

identify defective or poorly designed products and to make whatever changes
are necessary. But without addressing the underlying cause of a customer
return, the supply chain management process will have failed, and future
returns will likely persist.

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Types of Supply Chain Models

Supply chain management does not look the same for all companies. Each
business has its own goals, constraints, and strengths that will shape its SCM
process. These are some of the models a company can adopt to guide its supply
chain management efforts.

Continuous flow model: One of the more traditional supply chain methods,
this model is often best for mature industries. The continuous flow model
relies on a manufacturer producing the same good over and over and
expecting customer demand will show little variation.
Agile model: This model is best for companies with unpredictable demand Ad

or custom-order products. This model prioritizes flexibility, as a company

 may have a specific need at any given moment and must be prepared to
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pivot accordingly.
Fast model: This model emphasizes the quick turnover of a product with a
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short life cycle. Using a fast chain model, a company strives to capitalize on a
trend, quickly produce goods, and ensure the product is fully sold before the
trend ends.
Flexible model: The flexible model works best for companies affected by
seasonality. Some companies may have much higher demand requirements
during peak season and low volume requirements in others. A flexible model
of supply chain management ensures that production can easily be ramped
up or wound down.

Efficient model: For companies competing in industries with very tight

profit margins, a company may strive to get an advantage by making its
supply chain management process the most efficient. This includes utilizing
equipment and machinery in the most ideal ways in addition to managing
inventory and processing orders most efficiently.
Custom model: If any model above doesn't suit a company's needs, it can
always turn toward a custom model. This is often the case for highly
specialized industries with high technical requirements, such as an
automobile manufacturer.

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Example of SCM
Understanding the importance of SCM to its business, Walgreens Boots Alliance
Inc. decided to transform its supply chain by investing in technology to
streamline the entire process. That included using big data, collected from its
9,000 stores and 20,000 suppliers, to help improve its forecasting capabilities
and better manage sales and inventory. [1] In 2019 it appointed its first-ever
chief supply chain officer, a key leadership role in the company. [2]

The company has also incorporated supply chain management into its
environmental, social, and governance (ESG) initiatives, including those
involving human rights, animal testing, sustainability, and transparency
regarding product ingredients. [3]

Why Is Supply Chain Management Important?

Supply chain management is important because it can help achieve several
business objectives. For instance, controlling manufacturing processes can
improve product quality, reducing the risk of recalls and lawsuits while helping
to build a strong consumer brand. At the same time, control over shipping
procedures can improve customer service by avoiding costly shortages or
periods of inventory oversupply. Overall, supply chain management provides
multiple opportunities for companies to improve their profit margins and is
especially important for businesses with large and international operations.

How Are Ethics and Supply Chain Management Related?

Ethics has become an increasingly important aspect of supply chain
management, so much so that a set of principles called supply chain ethics was
born. Many investors today want to know how companies produce their Ad
products, treat their workforce, and protect the environment. As a result,
companies respond by instituting measures to reduce waste, improve working
 conditions, and lessen their impact on the environment—all of which can
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involve SCM.
How
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CONTENTS Do Supply Chain Management Jobs Pay?
Supply chain managers across the United States had average annual salaries in
the range of $109,645 to $140,513 as of December 2023, according to the
website Salary.com. [4]

The Bottom Line

A supply chain starts with the ordering of raw materials or components from a
supplier and ends with the delivery of a finished product or service to the end
consumer. In supply chain management, every link in that chain may offer an
opportunity to add value or reduce inefficiency. A well-run SCM program can
increase a company's revenues, decrease its costs, and bolster its bottom line.
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ARTICLE SOURCES

Related Terms
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A supply chain is a network of people and entities who are involved in creating a product
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A work-in-progress (WIP) is a partially finished good awaiting completion and includes
such costs as overhead, labor, and raw materials. more
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Lead Time: Definition, How It Works, and Example

Lead time is the amount of time from the start of a process until its conclusion. Reducing
lead time in manufacturing can increase output and revenue. more

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A requisition is a documented request for an item to be delivered by a certain date. Read
how requisitions work as part of the procurement process. more

International Commerce: What it Means, How it Works

International commerce is trade between companies in different countries, or just trade
between different countries. more

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